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EU Derivatives Rules May Damage Gas, Power Markets, Traders Say
2010-11-16 13:54:41.731 GMT
By Ben Farey
Nov. 16 (Bloomberg) -- Energy traders including Goldman
Sachs Group Inc. and RWE AG said a looming overhaul of rules
governing financial derivatives may damage European natural-gas
and power markets.
"What we're seeing is an unprecedented wave of regulation
to respond to the perceived failures originating in the
financial crisis," Paul Dawson, head of regulatory affairs at
RWE Supply & Trading GmbH, said last week at the European Autumn
Gas Conference in Berlin. "The regulation is disproportionate,
could be costly and could potentially damage our markets."
The European Union is planning new rules on financial
derivatives in the wake of the global economic crisis that may
force so-called over-the-counter trades to be "cleared" or
guaranteed by a third party. Traders who don't report details of
their deals may be fined under the proposals.
The rules won't allow U.S. traders to sidestep the
strictures of the Dodd-Frank financial overhaul, the largest
rewrite of Wall Street rules since the Great Depression, EU
Financial Services Commissioner Michel Barnier said Nov. 2.
Dodd-Frank stipulates that most interest-rate, credit-
default, commodity and other swaps be processed by
clearinghouses after being traded on exchanges or swap-execution
facilities. It also requires regulators to cap the number of
contracts a trader can hold in commodities such as oil, natural
gas and wheat.
'Turning Point'
"We're potentially at a turning point for all commodity
markets and European gas and power are no exception," Jonathan
Whitehead, managing director and head of EMEA Commodity Sales &
Structuring at Barclays Capital, said at the conference.
"People should be quite worried."
Brent crude oil climbed to a record $147.50 a barrel on
London's ICE Futures Europe exchange trading in July 2008. U.K.
winter gas reached a record 109 pence a therm at the same time,
pushing up heating and power bills for homes and businesses.
"Oil went to $140 a barrel and food became very
expensive," David Greely, Goldman Sachs' chief commodities
strategist, told the conference. "These are very integral to
the bottom lines of most families and the constituencies of most
politicians."
The rules under consideration in Europe will drive up the
cost of trading, reduce liquidity and curb participation in
markets, undermining competition and hurting European consumers
who will pay more for gas and electricity, according to Dawson.
Credit Qualities
End users of energy will suffer most through forced
clearing of contracts, Greely said, as clearing houses don't
account for credit qualities, forcing companies to pay deposits.
"It clearly ties up a lot of capital to put initial
margins in place, to put variation margins in place," said
Richard Field, head of European gas trading at BP Plc. "For a
lot of companies that's money they could put into investment."
APX BV's business director Andrew Claxton, whose company
offers electronic energy trading in Belgium, the U.K. and the
Netherlands, said forced clearing may have an unintended
consequence.
"Ironically, putting everything through clearing does
expose you to the clearing bank, so it actually does introduce
clearing to some of the systemic risks that exist elsewhere in
the financial system," he said. Still, Claxton said APX stands
to benefit from the new rules.
For Related News and Information:
Top gas stories: TGAS <GO>
U.K. Gas Prices: UGAS <GO>
--Editors: Rob Verdonck, Raj Rajendran
To contact the reporter on this story:
Ben Farey in London at +44 20 7673 2369 or
bfarey@bloomberg.net
To contact the editor responsible for this story:
Stephen Voss at +44 207 7073 3520 or sev@bloomberg.net
